|"SEC Makes Sweeping Enforcement Changes"
By Beagan Wilcox Volz
A new initiative aimed at encouraging individuals and firms to cooperate with the Securities and Exchange Commission’s enforcement division could be a big boon in the agency’s fight against financial crime.
The “Cooperation Initiative,” as the SEC has named it, permits enforcement staff to make various types of cooperation agreements in writing between the agency and witnesses to violations. They include deferred prosecution and, “under limited and appropriate circumstances,” non-prosecution agreements, according to an agency release announcing the changes.
For the first time, the SEC has established how it will evaluate whether to credit cooperation by individuals. Those considerations include the assistance provided by the cooperator and the importance of the matter in which he or she cooperated. The agency will also evaluate “the appropriateness of cooperation credit based upon the risk profile of the cooperating individual,” the release says. (The agency notes that it set out factors it considers in assessing cooperation by companies in its “Seaboard Report” in 2001.)
In the past, cooperation agreements were informal and did not always work so well, say industry attorneys.
“Before it was always uncertain as to what cooperation did for you until much later,” says William Sullivan, partner at Paul Hastings, who represents clients before the SEC. “[The new initiative] will move this discussion of what cooperation will mean to a much earlier point in investigations and will provide more certainty to those that decide to cooperate.”
The cooperation agreements could mean the SEC will bring “better and faster cases,” says Stephen Crimmins, partner at K&L Gates and deputy chief litigation counsel of the SEC’s enforcement division from 1993 until 2001.
“A lot of the cases that the SEC brings are based on circumstantial evidence or sometimes less than full direct evidence,” says Crimmins. But with cooperation, the SEC can get an inside look at a situation, he says.
Robert Khuzami, director of the enforcement division, noted in the release that similar tools have regularly been used by the Justice Department with success in its criminal investigations and prosecutions. They are a potential “game-changer” for the agency’s enforcement division, he said.
“There is no substitute for the insiders’ view into fraud and misconduct that only cooperating witnesses can provide. That type of evidence can expand our ability to conduct our investigations more swiftly, and to act quickly to file charges, freeze assets, and to protect investors,” Khuzami said.
At the same time it announced its cooperation initiative, the enforcement division also unveiled five national specialized units that have been created to focus on specific, complex areas of securities laws. One of the specialized units will focus on asset management, including investment advisors, mutual funds, hedge funds and private equity funds.
Nobody would say the asset management unit was created because of problems in the mutual fund industry, says Gregory DiMeglio, partner at Stradley Ronon and former senior counsel in the SEC’s enforcement division. Nevertheless, it’s likely that the unit will increase the scrutiny of the industry to a level it hasn’t seen since the height of the market-timing and late-trading investigations, he says.
The other new units are market abuse, structured and new products, foreign corrupt practices and municipal securities and public pensions.
A new Office of Market Intelligence has also been created; it is responsible for the collection, analysis and monitoring of tips and referrals that the agency receives.
“These units and the new office will help provide the additional structure, resources, and expertise necessary for enforcement staff to keep pace with ever-changing markets and more comprehensively investigate cases involving complex products, markets, regulatory regimes, practices and transactions,” a separate release about the reorganization says.
The asset management unit will be led by co-chiefs Bruce Karpati and Robert Kaplan.
The two are “recognized stars” in the enforcement division, says Crimmins. Karpati was the founder and head of the agency’s hedge fund working group and served as assistant regional director for the New York regional office. Kaplan was assistant director of the enforcement division and held other positions there previously.
It’s unclear exactly how the units will work with the enforcement division and other divisions, such as investment management.
“There are going to be organizational issues to be resolved, to be sure,” says Sullivan. “Whenever two divisions have to coordinate, there’s always going to be questions about delineation of authority” and other issues, he says.
The SEC’s failure to detect Bernard Madoff’s massive Ponzi scheme, despite repeated tips from an individual, spurred the ongoing overhaul of its enforcement division. The agency says it’s the biggest reorganization of the division since its establishment in 1972.
The division got a new director nearly one year ago. It has also added more experienced investigators, expanded staff training programs, and hired staff with new skill sets, the recent release states.